Think Tank

Health Insurer Consolidation Under Scrutiny

Consolidation in the health insurance industry is being scrutinized by Congress, consumer advocates and industry stakeholders.

The issue isn’t a new one, but two new proposed mergers — one between Anthem and Cigna and another between Aetna and Humana — have increased the volume of the debate this summer and fall.

This summer, Anthem announced plans to acquire Cigna for $48.4 billion. The combined company would have about 53 million customers, making it the nation’s largest health insurer. Aetna announced plans to buy Humana for $37 billion, making it the second-largest insurer with about 33 million customers.

More hearings on the issue are planned this fall in the Senate and the House.

We asked legislators, consumer advocates and stakeholders to point out the pros and cons of consolidation. We asked them how lawmakers and policy experts should proceed in order to provide the most benefit for consumers.

We got responses from:

John Garamendi , Former California insurance commissioner and lieutenant governor

In Health Insurance, Managed Competition Is Key

One of the key benefits of capitalism is the consumer choice created by the free market: Competition among providers of goods and services is supposed to result in a variety of consumer options at competitive price points. But for consumers, there can be a downside: The nature of competition, after all, is to win and defeat one’s opponent.

When this happens, competition can be reduced, possibly leading to a worse product at higher prices. For health insurance, that means less coverage and higher premiums. Since the days of Teddy Roosevelt, we have understood that the free market system must be actively managed to maintain healthy competition.

The recently announced mega-mergers in the health insurance industry illustrate this point. In the past few months, four of the largest health insurance companies in the United States have announced merger plans: Anthem said it was acquiring Cigna, and Aetna and Humana formed plans to combine. These four companies have around 125 million policyholders among them: that’s half of the non-Medicare-eligible population. The sheer size of these mergers in a crucial industry means that the public and the government have a right to understand the full implications.

Supporters of the mergers argue that bigger companies will be able to help keep down health care costs. There is legitimacy to this argument: The health care provider industry is also becoming consolidated, and larger insurance companies will have more leverage to keep costs low. But that’s not the only part of the equation. The real question is whether these lower prices will get passed on to policyholders.

Evidence from previous rounds of consolidation in the health care industry seems to suggest that’s not the case. Mergers have resulted in lower salaries for physicians resulting from the increased bargaining power of larger insurance companies, but policyholders did not see lower premiums as a result. Instead, premiums increased by 7%, and the increased revenue simply went as profit to insurance company shareholders.

Theoretically, the Affordable Care Act could change that. The new health care law sets mandates for medical loss ratios: in other words, capping the percentage of health insurer revenue that can go to profit and administration, and requiring that the rest go to paying for health care services. That’s a good step, but it could just mean that the few remaining insurers will simply stick to the minimum acceptable standard, rather than actually competing against each other to offer the best prices to the consumer — especially in areas predominantly served by one major insurer. Insurance companies are also very smart, and could easily find ways to game the system by fiddling with the price of services, or simply increasing profits by raising premiums or deductibles while maintaining the required percentage allotted to medical treatments.

The Justice Department should keep Teddy Roosevelt in mind when it makes its final decision on whether to approve these consequential mergers. Managed competition is the key to a functional marketplace in health insurance.

Like a cold war arms race, as providers consolidate and gain market power, insurers are bulking up by proposing mega-mergers. Consumers, caught in the middle, must not be left by the wayside as collateral damage. Regulators on the federal and state level need to aggressively scrutinize these deals to protect consumer interests.

When insurers decide to join forces rather than compete, consumer warning lights should flash. Consumers’ desire for coverage that delivers quality health care at an affordable price can be threatened if there is only a handful of competing insurers. Though supporters of the proposed mergers point to potential efficiencies and cost savings, there is no historical basis for thinking any savings would be passed on to consumers. In fact, the evidence shows that a high concentration of health insurers, as in other consolidated industries, results in higher prices.

Merging insurers argue that current protections in law — the medical-loss ratio (MLR) and rate review under the Affordable Care Act — will prevent any potential consumer harms. But there is reason to be highly skeptical of that assertion. First, rate review authority is very uneven across the nation. Not every state — including California — has the power to reject rate requests. For example, for three consecutive years (2013, 2014 and 2015) the California Department of Managed Health Care found the rates requested by Aetna for the small group market to be “excessive and unsupported.”

Aetna rebuffed the regulator’s finding and barreled ahead with the increases. Secondly, while the MLR requirement has been effective in disciplining insurers, it operates in only one dimension. There are numerous other ways insurer market power can be abused to harm quality and choice for consumers.

Health insurance market concentration and competition varies by state, region and market — individual, employer, and Medicare. The Department of Justice, state regulators and the Attorney General’s Office need to look at each segment carefully to analyze anti-competitive impacts on consumers. In addition, Consumers Union urges regulators to go beyond antitrust review, using their full authority. We urge them to hold public hearings on these transactions; to consider all potential cost, quality and health effects on consumers; and to ensure our rigorous consumer protection laws are not skirted. The health insurance world would not be a better place with super-power insurers and providers striking deals that leave the rest of us in the cold.

Health plans are committed to ensuring their enrollees receive high- quality, affordable health care. The best way to achieve these goals and promote innovation is through a health care marketplace that is competitive. Competition creates incentives for all stakeholders to be more efficient and provide better value to consumers.

In looking at the proposed mergers in the health care marketplace, it is important to understand that many mergers and acquisitions are beneficial to consumers. Consolidating companies can be pro-competitive. Combined entities can facilitate new and improved products and services and reduce costs through better efficiency. For example, a merger might combine an insurer with a strong track record of managing chronic conditions in the Medicare Advantage program with another insurer that demonstrates strengths in meeting the health care needs of financially vulnerable beneficiaries through its Medicaid products. The larger combined insurer could use those complementary strengths to benefit all members.

When two companies combine, the increased size of the merged company can provide cost advantages to consumers. Fixed costs are spread across a larger customer base, lowering the unit cost per customer. Another advantage is the facilitation of payment and delivery system reforms, and the streamlining of quality measures, which also benefit consumers.

There are two other considerations specific to the health insurance industry that should be noted during the Department of Justice’s review of the proposed health care mergers. The first is that there is no single national market for health care coverage. Consumers purchasing health insurance do so in different markets, and in search of various types of products. The second is the highly regulated nature of health insurance markets. Commercial health insurance plans, as well as those under Medicare Advantage and Medicaid, are subject to vigorous regulations, whether by local, state or federal entities.

In some cases, consolidation can adversely affect competition. But with the current evolution of health insurers and health insurance, comes an evolution of competition within local markets. Any review of mergers must consider the potential pro-competitive effects those mergers could generate for consumers in those markets.

When health plans consolidate, what’s most important to purchasers and consumers is that the value and quality of care they receive does not erode. The hope is that these mergers will result in a net positive for the more than 160 million Americans who have their coverage paid for by purchasers of healthcare — employers, state, federal, and municipal governments.

We also recognize that health plans in general have a vested interest in the wellness and wellbeing of the individuals and families they cover, and that they have no inherent desire to have quality of care be a casualty of their business endeavors.

Nevertheless, this will be a challenge. With increased market power and decreased competition, the concern is always that prices will go up and service will decline. Furthermore, as mergers increase, the inevitable result will be more health care data in the hands of fewer organizations, with no guarantee of sufficient transparency into how services are priced, what level of quality is being achieved and where consumers can to go to get the best care at the best price.

Some might suggest that the leverage these larger entities gain in negotiating with other health care partners — doctors, hospitals, and pharmaceuticals, will result in better pricing that will be passed on to purchasers and consumers. And while that would certainly be a desirable outcome, again, there are no guarantees.

In the big picture, purchasers know the larger issue is not the size of the organization, or even the bigger discounts they may be able to negotiate, but better designed care delivery with integrated services and aligned incentives supported by robust data systems. At the end of the day, plan consolidation is not the issue, system redesign is.

Anyone making a major purchase wants to maximize value by exploring their options. Shopping for the best of multiple options drives market competition and promotes innovation and efficiency. The benefits of purchaser choice in a competitive market are just as important to patients in the health insurance market.

Competition among health insurers can lower premiums, enhance customer service, and spur innovative ways to improve quality while lowering costs. Patients benefit when they can choose from an array of insurers that compete for their business by offering desirable coverage at affordable prices.

However, shopping for competitive health insurance options can be difficult when a market is controlled by one or two large commercial insurers. The lack of a competitive commercial health insurance market is a problem in 70% of metropolitan statistical areas, according to a new study by the American Medical Association.

The areas highlighted by the AMA study are vulnerable to a marketplace imbalance that favors powerful health insurers. In practice, a dominant health insurer can flex market power muscle to increase premiums, water down benefits and grow corporate profitability at the expense of high-quality care — all without fear of losing business to a competitor.

The trend toward market dominance in a heavily consolidated health insurance industry will continue if the nation’s five largest health insurance carriers are reduced to just three. According to analyses issued by the AMA, the combined impact of the Anthem-Cigna and Aetna-Humana mergers would exceed federal antitrust guidelines designed to preserve competition in as many as 97 metropolitan areas within 17 states, including California.

As I noted in my testimony to congressional leaders at a recent investigative hearing, we are at a critical decision point on health insurance mergers, because once consummated, there is simply no going back. Post-merger remedies are likely to be both ineffective and highly disruptive. You can’t unscramble an egg.

Thus, the AMA strongly believes that the time for heightened scrutiny and careful consideration is now, before proposed mergers take effect and patients are irreparably harmed. The solution lies in more, not less, competition.

The good news is there are steps that state and federal regulators can take right now to carefully review the proposed mergers and use enforcement tools to preserve competition.

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Health Insurer Consolidation Under Scrutiny

October 5, 2015

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